Remove barriers to spur cross-border M&As

Cross-border activities between India and the rest of the world have attained high traction in recent times and are likely to increase in the future. The past few weeks witnessed M&A activities between behemoths such as Tata-Corus, Vodafone-Hutchison Essar, Aditya Birla-Novelis etc. During this period of heightened merger and acquisition activity, India’s small, mid and large-cap companies are trying their hand at acquiring companies.

In the coming year, it is anybody’s guess as to how many more Indian companies will acquire leading global companies. The wait will be worth watching and is bound to be exciting! Overall, cross-border investment, both into and out of India, has been robust and increasing significantly. India has witnessed heightened M&A activity, both inbound and outbound. In 2005, India witnessed 56 inbound deals worth $5.2 billion and 136 outbound deals valued at approximately $4.3 billion (combined deal activity of $9.5 billion).

Compare this to how India Inc performed in 2006: Indian M&A market ended 2006 with approximately USD35.6 billion worth of transactions, spread over 1,164 deals. India ranks fourth, just after China as far as M&A activities in the Asia-Pacific region are concerned. Some of the key drivers fuelling increased deal activities include: accessing global markets, establishing or strengthening leadership positions, increasing a brand’s footprint, acquiring knowledge and skills to improve domain expertise, reducing vulnerability/exposure through size, obtaining scale, creating synergies with existing businesses, entering new markets, etc.

The world is witnessing a paradigm shift whereby the centre of economic gravity is moving from the West to the East. Indian companies are increasingly realising that there is a huge market potential within the country, buoyed by robust economic growth. And like their overseas counterparts, Indian companies are better leveraging the talent and skills of India’s workforce for their own operations. This change of mindset is perhaps giving Indian companies the confidence and gumption to enter overseas markets through M&A activities.

In the past, access to finance was a major challenge for Indian companies wanting to participate in M&A activities. This is has eased out to some extent today given the increased number of private equity players and investment banks who are willing to fund acquisitions. That said, companies do experience challenges in certain areas. Policy interventions by the government in a number of areas can have a trigger effect and enable Indian companies to more aggressively and easily participate in global M&A activities:

1. Restrictions on foreign investment (currently limited to two times the net worth under the automatic route)

2 Obtaining permits and approvals from the RBI and FIPB in share swaps

3 Taxation framework (non-allowability of interest paid on acquisition loans and lack of tax breaks on dividend income earned in foreign currency)

4. Pledge of shares in favour of non-residents

5. Funding of share acquisitions by Indian banks

6 Transfer of shares between residents and non-residents

7 Borrowing and lending in foreign currency

In this rapidly evolving global economy, growth strategies that involve Government protection, regulations or interference face constraints in the long term. Instead, efforts need to focus on easing visible and invisible barriers and regulations in order to enable easier movement of transactions. Consistently strong economic growth, a continuation of the reform process, improvements in infrastructure and amendments to policy frameworks by the Indian government will provide a further boost to FDI and deal activity.

Authors are executive director, and associate director, respectively, with PricewaterhouseCoopers